Can Corporations Deny Voting Rights to Delinquent Shares?
Introduction
Corporations may prevent holders of delinquent shares from voting at stockholders’ meetings, but only when the subscription has become legally due, the required call and declaration of delinquency have been properly made, and the statutory requirements have been observed.
The restriction applies to the delinquent shares covered by the unpaid subscription. It does not authorize the board of directors to arbitrarily cancel fully paid shares, invalidate outstanding certificates, or deprive a stockholder of rights unrelated to the delinquency. The law also does not permit the corporation to withhold all dividends without qualification.
What Are Delinquent Shares?
A subscription becomes subject to delinquency when the subscriber fails to pay the amount due on the date stated in the subscription contract or in a valid call made by the board of directors.
Under Section 66 of the Revised Corporation Code of the Philippines, the board may declare unpaid subscriptions due and payable, in whole or in part, together with accrued interest when applicable. If the amount is not paid within 30 days from the due date, the shares covered by the subscription become delinquent, unless the board orders otherwise.
The relevant provisions are found in Sections 66, 67, and 70 of [Republic Act No. 11232, Revised Corporation Code of the Philippines](#L1.80).
May the Board Deny Voting Rights?
Yes. Section 70 of Republic Act No. 11232 provides that no delinquent stock may be voted, be entitled to vote, or be represented at a stockholders’ meeting until the amount due on the subscription, accrued interest, and applicable advertising costs and expenses have been paid.
Section 23 of the Revised Corporation Code likewise provides that delinquent stock may not be voted in the election of directors. Consequently, a corporation may exclude delinquent shares from the voting process, including the election of directors, provided that the shares were validly declared delinquent.
The restriction is attached to the delinquent stock and is not merely a personal penalty against the stockholder. The corporation should therefore identify the specific subscription and shares affected and maintain accurate corporate records supporting the restriction.
What Procedure Must the Corporation Follow?
1. Determine the amount due
The corporation should verify the subscription contract, the amount already paid, the unpaid balance, the applicable interest, and the date when payment became due.
2. Make a valid call for payment
The board of directors may issue a resolution declaring the unpaid subscription or a specified percentage thereof due and payable. The resolution should state the amount required, the applicable interest, and the deadline for payment.
3. Allow the statutory period to expire
If the stockholder fails to pay within 30 days from the due date stated in the contract or board call, the shares covered by the subscription become delinquent, unless the board orders otherwise.
4. Record the delinquency
The corporation should properly record the board resolution, the amount due, the date of delinquency, and the shares affected. The stock and transfer records should accurately reflect the voting restriction.
5. Apply the restriction at the meeting
At the stockholders’ meeting, the corporation may refuse to count delinquent shares for voting or representation. In an election of directors, the delinquent shares may not be used for cumulative voting or any other voting method.
The corporation should nevertheless distinguish delinquent shares from shares that were fully paid and validly issued under a separate subscription or certificate.
Can the Board Block Dividends?
Not absolutely. Section 70 of Republic Act No. 11232 expressly preserves the delinquent stockholder’s right to dividends, subject to the rules in the Code.
Under Section 42, cash dividends due on delinquent stock must first be applied to the unpaid subscription, together with applicable costs and expenses. Stock dividends, however, must be withheld from delinquent stockholders until the unpaid subscription is fully paid.
Thus, the correct rule is as follows:
| Corporate right affected | Effect of delinquency |
|---|---|
| Voting and representation | May not be exercised until the delinquency is cured. |
| Election of directors | Delinquent shares may not be voted. |
| Cash dividends | May be declared, but the amount due is first applied to the unpaid subscription and related costs. |
| Stock dividends | Withheld until the unpaid subscription is fully paid. |
| Other stockholder rights | Generally suspended while the shares remain delinquent, subject to the Revised Corporation Code. |
Does Delinquency Affect the Entire Subscription?
As a general rule, the delinquency concerns the shares covered by the subscription declared due and unpaid. A corporation should not automatically treat unrelated fully paid shares as delinquent merely because the same stockholder has another unpaid subscription.
In [Baltazar, et al. v. Lingayen Gulf Electric Power Co., Inc., et al.](#J1.4), General Register No. 16236-38, 1965, the Supreme Court recognized that a stockholder holding certificates for fully paid shares may vote those shares despite unpaid subscriptions for other shares, unless the corporation’s governing documents validly provide otherwise. The corporation may not unilaterally cancel certificates or deprive the holder of voting rights over fully paid shares.
The board should therefore examine whether the shares presented for voting are part of the delinquent subscription or are separately issued and fully paid.
May Delinquent Shares Be Sold at Auction?
Yes. After the shares become delinquent, the board may order their sale at a public auction under Section 67 of Republic Act No. 11232.
The board resolution should state the amount due on each subscription, including accrued interest, and the date, time, and place of the sale. The sale date must be not less than 30 days nor more than 60 days from the date the shares became delinquent.
Notice of the sale, together with a copy of the board resolution, must be sent to the delinquent stockholder personally, by registered mail, or through another method authorized by the bylaws. The notice must also be published once a week for two consecutive weeks in a newspaper of general circulation in the province or city where the corporation’s principal office is located.
The stockholder may prevent the sale by paying the subscription balance, accrued interest, advertising costs, and sale expenses on or before the auction date.
What Happens at the Delinquency Sale?
The shares are sold to the bidder who offers to pay the full amount due for the smallest number of shares or fraction of a share. The purchaser receives the shares acquired, while any remaining shares are credited to the delinquent stockholder.
The corporation should not issue a certificate to the purchaser unless the statutory requirements for the sale have been satisfied and the full amount required by law has been paid. The corporation should also preserve the notices, publications, board resolutions, auction records, and payment documents.
What Restrictions Apply During Corporate Elections?
During the election of directors, the corporation must determine the shares entitled to vote based on the stock and transfer records and the applicable provisions of the bylaws.
Section 23 of the Revised Corporation Code permits cumulative voting, but expressly excludes delinquent stock from voting. A stockholder may cumulate votes only with shares that are legally entitled to vote.
A corporation should avoid using delinquency as a means to manipulate an election. The restriction must arise from an actual unpaid subscription and a properly established delinquency, not from a board resolution issued solely to prevent an opposing stockholder from participating.
What If the Board Improperly Blocks Voting?
A stockholder may challenge the exclusion if the corporation cannot establish that the subscription was due, a valid call was made, the 30-day period expired, or the shares were properly declared delinquent.
Improper exclusion may also occur when the corporation treats fully paid shares as delinquent, disregards the subscription contract, applies payments incorrectly, or denies voting rights based only on an informal board directive.
In [Baltazar, et al. v. Lingayen Gulf Electric Power Co., Inc., et al.](#J1.4), the Supreme Court rejected the corporation’s attempt to prevent stockholders from voting fully paid shares merely because they had unpaid subscriptions involving other shares.
Common Examples
Example 1: Entire subscription remains unpaid. A subscriber signs for 1,000 shares and fails to pay after the subscription becomes due and the board makes a valid call. After the statutory period expires, the 1,000 shares may be declared delinquent and may not be voted.
Example 2: Cash dividend declared. The corporation declares a cash dividend on shares subject to delinquency. The dividend is not simply erased. It must first be applied to the unpaid subscription, interest, and allowable costs.
Example 3: Stock dividend declared. A stockholder with delinquent shares is otherwise entitled to a stock dividend. The corporation must withhold the stock dividend until the subscription is fully paid.
Example 4: Separate fully paid shares. A stockholder has 500 fully paid shares under one subscription and 500 unpaid shares under another. The corporation should not automatically bar voting on the fully paid shares merely because the second subscription is delinquent.
Recommended Corporate Records
To support a voting restriction, the corporation should maintain the following records:
- the original subscription contract;
- the board resolution making the call for payment;
- the computation of the unpaid balance and interest;
- proof of notice to the stockholder;
- the resolution declaring the shares delinquent;
- the updated stock and transfer book; and
- the minutes of the stockholders’ meeting showing the shares excluded from voting.
The stockholder should request a copy of the subscription record, the call, the delinquency resolution, and the corporation’s computation of the amount due. These documents are important in determining whether the voting restriction was lawfully imposed.
Important Limits on Board Authority
The board’s power to enforce delinquency does not include the power to rewrite the subscription contract, declare unrelated shares delinquent, cancel fully paid certificates without legal basis, or withhold dividends contrary to Section 42.
Corporate bylaws may regulate voting procedures, notice, and the manner of documenting delinquency, but they cannot defeat the statutory rights and restrictions established by the Revised Corporation Code.
For nonstock corporations, the application of stock-corporation rules depends on whether the provision is pertinent and whether a special statutory rule governs the matter. Section 86 of the Revised Corporation Code states that provisions governing stock corporations may apply to nonstock corporations when pertinent, subject to the special provisions governing nonstock corporations.
Conclusion
A Philippine stock corporation may legally deny voting and representation rights to shares covered by a delinquent subscription. The restriction becomes effective only after the subscription is due, the board has made the required call or declaration, the statutory period has elapsed, and the corporation has properly identified and recorded the delinquent shares.
The board may not use delinquency to suppress voting on unrelated fully paid shares. Nor may it completely confiscate dividend rights: cash dividends are applied to the unpaid obligation, while stock dividends are withheld until full payment.
Corporations should conduct a subscription-by-subscription review before excluding shares from an election, comply strictly with Sections 23, 42, 66, 67, and 70 of Republic Act No. 11232, and preserve complete records. Stockholders who are excluded should promptly verify the underlying subscription, payment history, board resolutions, and notices before challenging the restriction.
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